Jack Dunn - Reclaiming Common Sense

Quantitative Easing was one of five major initiatives taken to attempt to jump-start the economy during 2009 and 2010. The five main stimuli were Quantitative Easing, Cash for Clunkers (Car Allowance Rebate System as a part of the Supplemental Appropriations Act of 2009,) part of the American Recovery and Infrastructure Act, the Troubled Assert Relief Program (TARP, also known as the Emergency Economic Stabilization Act.) and the Middle Class Tax Relief (Also known as the Payroll Tax Reduction Act or Making Work Pay Act or the Tax relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010.)


Quantitative Easing was not initiated in Congress, as it was an act of the Federal Reserve. CARS reduced the availability of used cars, and parts, driving up the price of new and used cars during a recession. The ARRI was supposed to create new roads for shovel ready projects. The payroll reduction act reduced the amount that workers paid into Social Security and "borrowed" money from the debt to fund the program.TARP is still on-going. It has not been decommissioned. It was the only program to run a profit. All we have left is a $4 trillion dollar Treasury Balance as part of the Federal Debt from Quantitative Easing.  Forbes does a good explanation of why quantitative Easing was done. Let's say that you might hear a considerable amount of news regarding the Velocity of Money over the next few hours, days, weeks, months or years.


The Law of Unintended Consequences Applies to Economics.  If you tighten up a loophole in the tax code another one opens. If you reward teachers for high passing rates then the standards for a passing grade may fall. If departments are rewarded for spending their budgeted amount of money then they will find new ways to spend the money (think of "hot tub man.") Quantitative easing was supposed to rolled into one reduce interest rates and spur spending. The problem is that the financial crisis of 2008-2010 was really multiple crises rolled into one: a housing crisis, a jobs crisis, and a retail crisis rolled into a precipitous drop in gross domestic product. The downfall of this was that as the government was trying to free up money they reduced the ability to lend money by placing higher standards on banks for loaning money and required banks to keep more money in reserve. If you have more money in reserve then you cannot spend that money. Neither could banks. They had one foot on the brake and one foot on the accelerator.


What ended up happening is that banks made loans where they could (credit cards and cars,) and held back on making loans where the government wanted the money to be spent (housing and businesses.) We saw, or at least anecdotally heard, that companies used cheap money to buy back their own stocks, thus pushing the stock markets to new heights


The Law of Unintended Consequences and the Federal Debt. It was also easier for the Federal Government to borrow money. Low interest rates applied to them as well. Senator Obama who said that President Bush adding $4 trillion to the Federal Debt was "unpatriotic" and "irresponsible" saw nearly 9.9 trillion dollars added to the debt under his watch. Remember TARP? That was charged to Bush and Credited to Obama. Obama's debt was actually higher. The interest on the debt costs us over $4000 billion a year and will soon approach $1 trillion a year. If the federal government raises interest rates they could see the interest rates that they pay on the debt rise, too. Unintended consequences again.


Old School Economics: Stocks, Bonds, Precious Metals, Commodities. I took economics classes in high school, college, and grad school. Go figure. We learned that as money flooded to the stock market, bond prices fall. When bonds are "bid up" their yields fall. When they are sold  their prices fall and their interest rate rise. It was a constant dance between Bonds and Stocks. Bonds up, Stocks down. Stocks Up, Bonds down. When things looked like they were going to get ugly money flowed from stocks and bonds into gold and precious metals. Historically low interest rate meant bonds were not an option, so money flooded to the stock market.


Are we heading toward Quantitative Acceleration? If the purchase of treasuries was Quantitative Easing is the selling of those treasuries going to lead to quantitative acceleration? Will we see companies sell their stocks to generate funds, as Jeff Bezos from Amazon is doing to fund his Blue Origin program? If the Federal Reserve sells its treasuries then we should see the federal debt drop and the interest on the debt drop.


If interest rates rise will it spur more home buying? If we see interest rates rise then we may see banks want to loan money. I was a Realtor during the 1990s and early 2000s. We saw massive refinancing as interest rates fell from 10% to 9% to 8% to 7%. When interest rates stabilized people felt that it was a good time to buy a new home instead of refinancing their current home. When interest rates threatened to rise buyers "freaked out" and bought homes and locked into their interest rates.  When the market was "humming" and interest rates were stable we saw revisions to the Capital Gains Tax on homes which allowed people to sell their homes every two years and collect their gains more than once a lifetime. No longer were there "tainted" spouses. Then we had no-doc loans, 3-2-1 buydowns, 80% first mortgages and 20% second mortgages, and 100% to 140% refinance loans. Money was cheap - houses were cheaper.The problem was when people felt confident that they could hold one house while they purchased another home via "bridge loans."  Then the housing market tanked. Then we had people taking low prices to get rid of dead weight or people lost homes after they lost jobs.


Will Quantitative Acceleration hit the stock market? Here is the thing: if interest rates rise then people may save more money. If people save more money banks may have more money to loan. If banks have more money to loan people may buy more homes and cars. There may be less money flowing into the stock market, from corporate cash, and more money may be spent on capital investments or corporate hiring.


If more people are hired, more people may spend more money. Will higher interest rates reduce the growth in the average sales price for existing home sales  and new construction homes? Will stabilizing prices spur more people to buy homes? Will home sales spur furniture and appliance sales, retail sales that have been lagging for years? Higher interest rates, if they get too high, may stifle the economy.


Quantitative easing cost us $85 billion dollars a month. If the Federal Reserve sells at the same pace that they bought then this will take years to accomplish. If it takes years to accomplish , to hearken back to the brake and clutch analogy, we may have a rough first gear, we might pop the clutch, or we might have a smooth release as we work through first gear, second gear, all the way to top gear. We are on a road trip with no maps. Quantitative easing had not been attempted before 2009. Quantitative Acceleration is in a similar situation. The car was pulling left during 2008 and was realigned during 2016. We have a new driver. We may have a new engine. The regulator, or governor, may have been removed. We still may have the parking break engaged (Obamacare.)  Quantitative Acceleration is coming. When?  How much? How often?


It's the economy.